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Got A Notice For GST Audit? Here’s What You Should Do

Bloomberg Quint |
Gunjan Prabhakaran, Partner and Leader
Indirect Tax

08 December 2020

In a bid to shore up declining tax collections amid increasing instances of fake invoicing and bogus input tax credit, GST authorities have started issuing notices to taxpayers, seeking to initiate a departmental audit.

They are seeking information and documents from businesses relating to financial years 2017-18 and 2018-19.

A departmental audit usually involves verification of the taxpayer’s books of accounts and visits to its office or business premises. Sec. 65 of the Central Goods and Services Tax Act requires an authorised officer to issue a 15-day notice before initiating such an audit and complete the process within a maximum period of six months.

In notices reviewed by BloombergQuint, the GST authorities have asked the taxpayers to submit copies of financial statements, GSTR-1, 2 and 3B returns, TRAN-1 form for transitional credit along with GSTR-9 annual return.

Here’s what businesses must do to prepare for a GST audit:

What Should Taxpayers Be Prepared For?

Taxpayers must have a proper documented plan to address any potential notice from the authorities. That’s because in some instances, the department has only provided 15 days for filing replies, experts pointed out.

Nirmal Singh of tax consultancy firm Nangia Andersen LLP said that departmental audit involves an exhaustive examination of tax records and processes. It will be even more complex for taxpayers who have multi-state operations, he said.

The different stance and approach adopted by state GST authorities adds to the complexity.

Jigar Doshi, partner at tax consultancy TMSL LLP said some state authorities have gone to the extent of questioning the internal control measures undertaken, stock count and other aspects which may seem to be out of place for an indirect tax audit.

Lack of uniformity and non-standardised notices received from different state GST authorities hardly depicts that "we have moved to a uniform tax regime," he said.

How Should Taxpayers Respond?

The GST department selects taxpayers for audit based on certain parameters like turnover, risk factors, credit utilisation along with alerts generated by the GST system. Once a taxpayer is selected, the department issues notice requiring it to produce adequate documents for substantiating the activities during the reporting period.

While the extent of required documents can vary on a case-to-case basis, authorities may commonly seek certain underlying documents.

Nirmal Singh explained that taxpayers must maintain a state-wise master-file containing key documents like financials, income tax and transfer pricing audit reports, copies of GST returns, tax credit register, sample agreement with customers, and summary of payment conditions to customers.

A taxpayer must also maintain transaction specific documents relating to manufacturing process, invoices and E-way bills in these master records, he added.

For instance, lets say “A” is a retailer having operations in all 29 states in India. It will thus be subject to both Central and State GST in all the states. Similarly, it will procure goods for local suppliers in each of the states. Central or state GST authorities may seek area-specific information and hence, a state-wise master file incorporating the above elements will be required in case of an audit. 

What Should Taxpayers Account For?

In preparation for a GST audit, businesses must focus on two key aspects- tax positions and utilisation of input tax credit.

Tax Positions: The purpose of a GST audit is to also verify whether a taxpayer has adhered to government notifications and court precedents.

For instance in December last year, the government limited availment of input tax credit on missing invoices up to 10% of the eligible credit generated from information on valid invoices. Similarly, a lot of services and input goods have been reclassified, resulting in reduction or increase in the GST rates.

This is the right time for taxpayers to corroborate tax positions by conducting a GST health check review for key tax policies. In case of any discrepancies, tax can be paid along with applicable interest. Businesses may avoid attracting penalties if this is already done prior to receiving an audit notice.Jigar Doshi, partner, TMSL LLP

Additionally, court rulings on legacy issues from the service tax and VAT era will also be relevant to an extent even in the GST regime, Singh pointed out.

Tax Credit: Recent investigations by the department have unearthed vanishing and untraceable exporters who have been involved in tax credit frauds by showing fake exports. In fact, the Federation of Indian Exporters Association—a trade body—conceded that some of its members may have been fraudulently utilising tax credit. The departmental audits also target such instances.

Taxpayers must carry out reconciliations between turnover reported in their audited financials and the one reported in GST returns to ensure all supplies falling within the ambit of GST laws are properly reported, Gunjan Prabhakaran, partner at BDO India LLP, said.

Businesses must carry out reconciliation between GSTR-2A (monthly returns on purchases) & GSTR-3B (monthly return on inward and outward supplies) to ensure that only eligible credits have been availed. Any gaps arising on account of such reconciliations must be identified and documented.Gunjan Prabhakaran, BDO India LLP

Taxpayers must also track vendor payments as any input tax credit claimed on unpaid invoices beyond 180 days from invoice date is liable for reversal, she said.